Near-term change, long-term effects

A few legal and regulatory areas fare in 2017 could hold key for larger reform beyond this year

It is that time of the year. A new year is born. Somehow, magically everything seems possible. Yet, the day’s sentiment makes it easy to get despondent about what can indeed be achieved. To quote Bill Gates, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.” Through that prism, what does the new year have in store? This piece will pick a few legal and regulatory areas that would be at the core of change this year.

First, the year may kick off with the appointment of a new chairperson of the securities market regulator. The new incumbent, if there is one, would face several challenges. Even while state policy appears to bring more of the population into financial assets, with financial technology paving the way, financial inclusion, particularly in the securities market, remains elusive. A range of policy measures intended to “protect” the small investor has backfired, with unintended and counterproductive outcomes — examples range from an informal “safety net” to save investors from equity risks killing the equity markets instead, to asking brokers to put away funds when small investors have a business dispute resulting in brokers, who care for their balance sheets steering clear of small investors. The process to participate in our equity markets is overwhelming, and householders who save are easily deterred by the burden of tapping into the securities market, and settle for gold and real estate instead.

There is still talk of the need to remove the age bar for regulatory chairpersons. The argument goes that the Reserve Bank of India’s governor does not face an age cap and yet “young” incumbents are found. But if that is an argument to keep the office warm for retired bureaucrats, it would be the tyranny of age in an age-discriminating society scoring a relentless march in one more sphere. Only last week, the Supreme Court directed an age cap for incumbents in the Board of Control for Cricket in India. What is good for the sports regulator is good for regulators of market activity. Changing the age limit would need an amendment of law. Only a presidential ordinance can pull this off, but appetite for an ordinance on this subject would be weak. A Constitution bench of the apex court recently deprecated the practice of resorting to ordinances lightly. The chairperson’s office apart, there is already one vacant office of full-time member and another will become empty this year, resulting in a complete change of guard this year. The key for this new team would be to shed the baggage of legacy if it becomes a hurdle to imaginative thinking while not trying to reinvent the wheel in the name of bringing a fresh mind to bear.

Second, in the market for lending and borrowing of funds, this will be the first year when the new bankruptcy law runs its full course. A regulator for bankruptcy professionals has been set up and it has begun work in earnest. The process for a creditor to initiate bankruptcy proceedings, with an intermediate step of attempting to resolve the defaulting borrower, if run well, would change the landscape. The design of the new law is meant to change the approach from one where the tendency of courts is to attempt revival of moribund business ideas with a large heart, to one where insolvency is not shied away from. Living in a dying state for decades has been the way of life in this space, and if administered well, this area of law and policy will be a game changer.

Much will depend on how effectively the Debt Recovery Tribunal and the National Company Law Tribunal function and operate this law. Business process re-engineering of these tribunals holds the key. If process reform does not take place, we would have thrown yet another law at the problem without creating an effective environment for a proper solution. If recent administrative decisions are any indication, it may be imprudent to hold one’s breath here. In Mumbai, the Debt Recovery Tribunal has been moved to outside Mumbai while the newly set up National Company Law Tribunal is located in south Mumbai, the old commercial business district.

Third, a blind merger of appellate tribunals is on the cards. One strange idea is the merger of the Securities Appellate Tribunal, which is now an appellate court to hear challenges to orders passed by regulators of capital markets (including commodity derivatives markets), the insurance sector and the pension sector, with the National Company Law Tribunal, a court that hears petitions of a specific nature set out in company law. The composition of these tribunals is different, the skill sets required are differentiated, and their experience and track record are substantially varied. If at all one wants convergence in matters of corporate regulation, one would need to first effect a merger between the capital market regulator and the office of the Registrar of Companies, coupled with a lot of the functioning of the Ministry of Corporate Affairs.

One could, of course, have a long-term goal of having an Upper Tribunal like in the United Kingdom, which, as an administrative tribunal, is not an appellate tribunal but, in fact, a trial court. Here in India, our regulators are the courts of the first instance, playing a quasi-judicial role despite playing a legislative role and an executive one, too, within the same organisation. In the UK, if the regulator cannot convince a party to accept sanctions, the regulator would have to prove its case in the Upper Tribunal and secure an administrative order. In India, our regulators are free to issue “such directions as deemed fit” in “public interest” and the appellate tribunal is only a post-event check and balance.

Finally, this year began with a new Chief Justice of India taking office. How J S Khehar, known for his candour and activist-leadership style, and Prime Minister Narendra Modi handle relations between the executive and the judiciary will set the tone for how the Modi administration performs not only this year but also for the rest of its term. Watch this space.
This column was published Without Contempt in the Business Standard edition dated January 5, 2017

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